Foreign governments ready cash grab on U.S. earnings
Opposition to foreign taxes on American investment and hard work has been coded into our national DNA for almost 240 years. Yet almost two and a half centuries after resolving that we would not stand idle while others decide how to tax us, Americans once again must take decisive action to guarantee we can enjoy the dividends of our ingenuity.
Unlike the pre-Revolutionary era, our own policies are partly responsible for the current environment. U.S. companies that do business globally are holding an estimated $2 trillion in capital abroad, and domestic intellectual property investments are at risk because our existing corporate tax structure is outdated and punitive. We currently have the highest corporate income tax rate in the idustrialized world. Last week, a study by the Tax Foundation ranked the United States 34th out of 36 industrialized countries in the competitiveness of our tax code.
Yet just as back in the days of the Founding Fathers, other countries have identified American revenue as an opportunity to fund their own needs and priorities. While U.S. policymakers continue debating how best to reform the tax code to bring the capital of U.S. companies home, foreign governments are making their own plans to grab it and future investments into research and development.
This week, the Organization for Economic Cooperation and Development (OECD) will announce its final package of measures under its Base Erosion and Profit Shifting (BEPS) project that would enable foreign governments to tax overseas earnings of American companies. If the United States fails to make changes of our own before that plan begins being enacted next year, this effort, which The Wall Street Journal called “a global revenue grab,” will ensure much of these American earnings stay overseas permanently. In turn, our country’s own policy debates over tax reform or domestic spending become moot.
In a world where R&D investments in intellectual property are highly mobile, the BEPS project also risks siphoning off good American jobs and R&D investments and moving them abroad. In recent years, some countries have developed a pro-growth policy tool called an “Innovation Box,” which provides lower tax rates on income generated from an intellectual property. But under BEPS, companies will need to locate their R&D research and the high-paying jobs that go with it in the country offering the innovation box — and right now, the U.S. tax code doesn’t include one.
To keep the OECD from slamming the door closed on our ability to undertake comprehensive tax reform and pressuring American companies to relocate R&D investments abroad, Congress needs to act now on a meaningful reform measure that would stabilize our corporate tax base and address the BEPS threat. The best example of how to do it is to create an innovation box of our own.
Updating the U.S. tax code before the end of this year by creating an innovation box would ensure that a broad group of American companies — from manufacturers to high-tech — can keep their research investments, jobs and revenue at home in the U.S.
A study of large biotech and pharmaceutical firms by MIT Professor Michelle Hanlon and former Treasury Department official Ike Brannon found that adding an innovation box to the U.S. tax code would “make it much more likely that companies would return their [intellectual property] to the U.S., and less likely that they would shift future IP abroad.”
Establishing an innovation box would also serve as a first step toward comprehensive tax reform. The case for comprehensive reform is based in large part on stabilizing America’s corporate tax base. If Congress fails to address the BEPS threat this year, foreign governments will be using the taxes they collected on that revenue for their own purposes — and little will be left to bring home.
Since before Washington, Jefferson and Madison rose to prominence, foreign governments have crafted policies to tax American resources to help pay their own bills, and that approach continues today. We can respond with a revolution in pro-growth tax policy by enacting an innovation box here in the U.S. this year to once again thwart those plans.